The 70s are back in a big way, and while it’s not that bad in fashion or music, it’s safe to say that no one really wants the 70s economy to come back. It was the decade that brought stagflation, an unpleasant combination of high inflation, rising unemployment and stagnant job growth. Economists had long thought this combination impossible, but the economic mismanagement of the Carter administration proved them wrong.
At least one top economist, Mohammed El-Erian of Allianz, sees a period of stagflation on the way, in the form of a global economic meltdown from which few nations will emerge unscathed. As El-Erian sees it, inflation is too high and the Fed’s rate hikes to curb it are not enough; hikes are more likely to stifle growth while forcing the labor force to shrink. The result: in the short term, rising prices, rising unemployment, and slow to nonexistent GDP growth, or in a word, stagflation.
“Weaker US growth and a late #Fed forced to hike 75 basis points for a record 3rd consecutive time are consistent with global stagflationary trends.” I would not be surprised to see further revisions to growth,” El-Erian wrote.
This is a situation that calls for defensive moves on the part of investors, with an emphasis on securing an income stream that will provide some protection against inflation. In the stock world, this is a recipe for dividend stocks.
We have used TipRanks platform to find a pair of dividend payers with a strong street buy and reliable dividends that have a history of steady payments. And even better for defensive investors, both stocks have outperformed the overall markets this year, posting positive stock gains where the broader markets have declined.
Merck & Co., Inc. (MRK)
We’ll start with Merck, the famous pharmaceutical company. This firm is one of the giants of the Big Pharma world, with a market capitalization of $218 billion and more than $50 billion in annual revenue, of which about $22 billion comes from the US market and $13 billion from European markets. Merck aims to become the world’s leading research-driven biopharmaceutical company and boasts an extensive clinical trial program, with 83 programs undergoing phase II studies and another 30 in phase III.
Among Merck’s more recognizable products on the market today are Gardasil, an HPV vaccine used to protect women from cervical cancer, and Remicade, a biologic antibody-based anti-inflammatory drug used in the treatment of autoimmune diseases such as Crohn’s disease and rheumatoid arthritis. arthritis. Historically, Merck is the creator of the MMR (measles, mumps, rubella) vaccine, which has become the standard for newborn babies.
Big pharma may have a controversial reputation, but as Merck’s story shows, our medical system really needs them. And Merck satisfied that need for solid financial results. In the company’s recent 2Q22 report, the top line was $14.6 billion, up 28% year over year. That number includes 36% year-over-year growth in sales of Gardasil to $1.7 billion and 26% year-over-year growth in sales of the cancer drug Keytruda, which reached $5.3 billion. On the earnings side, non-GAAP EPS rose 42% from the prior quarter to $1.87 per share.
This last is an important indicator, as earnings per share help ensure the affordability of the dividend. Merck pays out 69 cents per common share — so EPS fully covers the payout — which annualizes to $2.76. At this rate, the dividend gives a yield of 3.2%. Merck has a 12-year history of both maintaining reliable payouts and delaying dividend increases.
With that in mind, it’s no wonder the company’s stock is up 16% this year, far outperforming the overall market.
All this impressed the analyst Berenberg Louisa Hector, which recently upgraded its stance on MRK stock, writing about the company: “For investors looking for a low-risk option in the pharmaceutical sector, we believe Merck & Co offers many attractions: mid-term growth just above the sector average, limited burden at patent expiration, low exposure to US pricing reform, margin expansion and lack of litigation surplus. Sales growth is heavily dependent on Keytruda and Gardasil, but we believe there are limited competitive threats… We would support the return of Keytruda’s cash flows in the form of dividends and buybacks. Merck & Co is our preferred value name in big pharma.”
Hector upgraded this stock from Neutral to Buy, and its $100 price target indicates its belief in a 15% one-year upside potential. (To watch Hector’s record, Press here)
From a consensus rating of Strong Buy based on 10 Buys and 3 Holds, it is clear that Wall Street generally agrees with the bullish outlook for this prominent biopharmaceutical company. Shares are priced at $86.64, and their average price target of $100.75 suggests an upside of ~16%. (Check out the MRK stock forecast at TipRanks)
American Electric Company (AEP)
Let’s change the pace for the second action and move from biopharma to public service. American Electric Power is one of the largest electricity providers in the U.S., with more than 40,000 miles of transmission lines powered by more than 26,000 megawatts of generating capacity—a number that includes about 7,100 megawatts of renewable power and 5.5 million customers in 11 countries. AEP, with its large footprint in an absolutely important economic niche, is a prime example of a defensive stock, and indeed utilities have long had a reputation for being “recession-proof.”
A look at AEP’s financial results shows that the company is doing well so far this year, despite the first and second quarters recording a decline in GDP. AEP reported $4.6 billion in revenue, with non-GAAP operating earnings of $617.7 million. While the top line was relatively flat year over year, profits were up over 28%. Non-GAAP earnings per share came in at $1.20, up slightly from a year ago’s result of $1.18.
In addition to the solid results, AEP reiterated its full-year 2022 guidance, with non-GAAP earnings expected to be in the range of $4.87 to $5.07 per share. The company expects a 6% to 7% long-term growth rate going forward.
In one key performance indicator, AEP shares are up about 16% this year, dramatically outperforming the overall market.
Again, we are looking at a company whose earnings fully cover the common stock dividend. The latest filing set the payment at 78 cents per share and was paid on September 9. The current dividend is $3.12 annualized and yields 3.1%. However, the real key to this dividend is its extreme reliability. AEP boasts that it has paid a cash dividend in every fiscal quarter since 1910, making this latest payment the company’s 449th consecutive quarterly payment. There are very few public companies that can achieve this level of long-term dividend reliability.
Among the bulls is the Morgan Stanley analyst David Arcarowhich sees AEP as a favorite among utility stocks.
“Utilities have outperformed the S&P by 20% this year. We think the space will continue to hold its value on a relative basis and potentially outperform slightly in the event of a weakening economic backdrop or a full-blown recession, given the utility group’s tendency to outperform post-peak earnings and post-recession. Valuations have expanded, but we still don’t see a clear case that the group is overvalued – valuations relative to the S&P 500, historical levels and bonds are below previous highs over the past 10 years, so we think there’s no economic upside the space is still reasonably valued for its defensive characteristics. In the event of a recession, we expect low-risk names to outperform and favor AEP,” Arcaro explained.
To that end, Arcaro rates AEP shares overweight (i.e., buy), along with a price target of $118, implying a one-year upside of 18%. (To watch Arcaro’s record, Press here)
In total, AEP collected 8 analyst reviews in recent weeks, and they include 6 buys over 2 holds, for a strong consensus rating of Buy from the Street. (See the AEP stock forecast at TipRanks)
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Rebuttal: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.